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The Brazilian Economy-1980/97: from Hyper-Inflation to Stabilization

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The Brazilian Economy-1980/97: from Hyper-Inflation to Stabilization Working paper No.62 The Brazilian Economy-1980/97: From Hyper-Inflation to Stabilization by Claudio Monteiro Considera Institute of Applied Economics Research Ministry of Planning and Budget March 1998 Department of Research Cooperation Economic Research Institute Economic Planning Agency Tokyo, Japan Any opinions expressed here are those of the authors and not those of the institution to which the authors belong. THE BRAZILIAN ECONOMY－1980/97 From Hyper-Inflation to Stabilization CONTENTS 1. Introduction 2. The Social and Economic Crisis－ 1980/92 2.1. The Record of the Crisis 2.2. The Origin of the Crisis: the Domestic and External Debts 2.3. The Stabilization Programs: a Chronicle of Failures 3. The Transaction Period : 1993/94 3.1. Political Transition: Development cum Inflation 3.2. The First Semester of 1994: the Transition by the URV 3.3. The New Currency: The Real 3.4. The First Nine Months of the Real: the Overheating of the Demand 4. Stability with Small Growth: 1995－97 4.1 The Impact of the Mexican Crisis 4.2 Consolidation of Stability and Economic Recovering 4.3 The Impact of the Asian Crisis 5. Real Plan, Macroeconomic Stability and Social Development-an Overview THE BRAZILIAN ECONOMY－1980/97 From Hyper-Inflation to Stabilization1 Claudio Monteiro Considera2 1. Introduction Brazilian experience along the 80’s and the beginning of the 90’s has been characterized by a general tendency to stagnation associated to the persistence of deep macroeconomic disequilibrium－in particular, by high and increasing inflation. Notwithstanding the localized spells of growth, usually related to expectation involving the future behavior of inflation, between 1980 and 1992 the economy has grown at an average of only 1.25% p.a., in this manner forcing the per capita income to drop to 7.6% during the period. Thus, along those years, a considerable deterioration of the living conditions of a significant share of the population has been verified, with regards to perspectives of overcoming the structural problems related to misery and social inequality. More than simply reflecting the external disequilibrium (deriving from the crisis related to the external debt) and the internal one (associated to the persisting public deficits and the continuation of extremely high inflationary levels), this period is characterized, in fact, by the exhaustion of the post war development strategy. This has been based in the substitution of imports and in strong State intervention in productive activities－which have oriented the Brazilian industrialization process since the beginning of the 50’s. The failure of the several attempts to stabilize the economy along the 80’s can therefore be attributed, to a large extent, to the lack of acknowledgment of the need to promote structural changes that would lead to a new pattern of development. This new pattern should be less dependent upon state intervention and commercial protectionism. There also have been a total incapacity to provide the political support required for the accomplishment of the reforms. The long sequence of frustrated stabilization plans during the 80’s and the beginning of the 90’s (five plans in six years) has produced a strong economic instability which led to a continuous tendency of inflationary acceleration. Inflation has failed to acquire an explosive character, such as occurred in other countries, solely due to the characteristics of our indexation system (to a large extent guaranteed by the government itself). The financial system developed domestic 1 This article is based upon: C. M. Considera, et alii, A Retrospect of the Brazilian Economy, in Perspectivas da Economia Brasileira － 1994, IPEA, Rio de Janeiro, 1994, chapter 1; P. Levy and Leda Hahn, The Brazilian Economy in Transition: The 1993/96 period, in Perspectiva da Economia Brasileira － 1996, IPEA, Rio de Janeiro, 1996, chapter 1; and in the IPEA, Conjunctival Bulletin, several numbers. 2 Research Director of the Institute of Applied Economics Research － IPEA, Ministry of Planning and Budget, Brazil. －1－ substitutes for the currency (ultimately, also guaranteed by the government), that allowed a less painful coexistence (and, sometimes, an even profitable one) with the inflationary process for those who had access to such innovations. Nevertheless, excluding those moments when speculative behavior led to the non-sustained growth of the demand (as, for example, along 1989), what is observed is a long run tendency to the increase of unemployment, specially during the second half of the decade. Moreover the investment rates has been reduced all along this period, which contributed to render future growing perspectives even more tenuous. From 1993 on this picture begins to change. Stimulated by a more favorable external situation－ with the recovering of capital flows for the emergent markets in a context of accentuated decreases in the international interest rates- and the surmounting of the political crisis derived from the president impeachment process, the economy starts to show signs of recovery, although still in the midst of the strong instability generated by still high inflation rates. This growth already reflected the changes in the conduction of the economic policies, which characterized the turn of the 90’s. In particular, the progressive removal of the mechanisms of protection against external competition and steps being taken towards the deregulation process and privatization began already to outline a new economic environment. It leads the enterprises to incorporate, with an increasing tendency, the rationalization of costs and productivity increase in their development strategies. The proposal of this article- which consists, at the same time, of a retrospective of Brazilian economy during the period in question- is to analyze the first four years of the Real Plan. The perspective is that no stabilization process can succeed if it does not bear the structural changes which eliminate the basic causes for the inflationary process, generally deeply incorporated not only to the behavior of the economic agents, but also to the very essence of the previous development model. Under this perspective, structural reforms acquire a crucial dimension for the consolidation of a new phase of sustained development, even if, in the short run, stability may be sustained only through the adequate handling of the instruments of monetary and exchange policies, maintaining the economic growth below its potential. 2. － The Social and Economic Crisis － 1980/92 2.1－ The Record of the Crisis The Brazilian economic crisis, which except for short intervals, has already been lasting for 13 years, has interrupted the dreams of having the country on its way to become a modern industrial economy. In fact, during this period Brazil has substituted annual growing rates of the GDP around its historical post-war average of 7%, and inflation rates that had never been above 8% p.m., by an unprecedented crisis that has combined recession, inflation and a brutal increase of social and economic inequality. At the end of 1992, the GDP had accumulated a growth of 17.4% in relation to 1980, while the population had increased in about 25.8%, which resulted in a decrease of 7.9% of the per capita GDP. The industrial sector (metal mining, transformation, construction and industrial public utility services), in its turn, presented a lower level (－1.6%) than that of 1980, thus, 21.8% －2－ inferior in per capita terms. The most serious consequence, nevertheless, has been the performance of the manufacturing industry, which had been extremely dynamic in the past: its production level, in 1992, has been around 7.3% lower than that of 1980 and, thus, 26.3% inferior in per capita terms. Also alarming has been the reduction of investment capacity of Brazilian economy. The share of the GDP destined to the gross formation of fixed capital has decreased from 23.3% in the 70’s to 18.3% in the 80’s and to 15% at the beginning of the 90’s. The quality of investment and the incorporation of advanced technology have also decreased, from what could be verified from the decrease in machines and equipment participation in total investment and from the imported equipment on the total of machines and equipment destined to the gross formation of capital in the country: while in the 70’s these proportions were respectively of 36.9 and 23.3% in average, during the 80’s they have decreased to 26.4 and 11.2%, down to as low as 26.2 and 9% in 1989. Another perverse aspect of the crisis is the reduction in private per capita consumption, which returned in 1992 to the levels of 1978 both as a result of the decrease of the Gross Domestic Product and the transference of real resources abroad. Brazilian inflation, an old disease, has even reached, in the post－80 period, an annual rate above 2,500% (1989), with the average situated around 580%, in contrast to the annual average below 40% of the 70’s. With the decrease of the Gross Domestic Product, and the inflationary acceleration, labor income has been reduced. The minimum wage corresponded in 1992 to less than 50%, in real terms, from that in force at the beginning of the 80’s. In its turn, the rate of open unemployment in 1992 reached higher levels than those of the beginning of the decade. In the case of industrial employment, data from the IBGE show that their level in 1992 has been the lowest ever-registered. With the 1990/92 recession, the level of employment in Brazilian industry becomes 27% inferior to that of 1980. In particular, the Sao Paulo industry has destroyed around 450 thousand jobs during the 1990/92 period. The income concentration, measured by the Gini index, has also become more severe. That happened not only because of unemployment at the less qualified strata of the population, but also and mainly, due to the effects of inflation.
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